Divorce, unfortunately, is an issue we deal with from time to time. When a couple has filed joint returns for years, and now seeks to file separately, several issues can arise, particularly around estimated tax payments.
When a couple files a joint return, estimated tax payments for the current year are typically credited to the first person listed on the previous year's joint return -- the “taxpayer” on a 1040. That may seem like no big deal, but trouble can arise if the second person -- the “spouse” -- earns substantially all of the income in the relationship. Currently, there is no reliable way to communicate to the IRS or state that the estimated tax payments belong to the “spouse”. The “taxpayer” is listed first and is therefore credited with the estimated tax.
Dividing estimated payments:
The IRS allows divorcing couples to divide estimated tax payments in any way they can agree upon. If no agreement is reached, the IRS recommends that estimated tax payments for the current year be divided in proportion to each spouse's tax as shown on their current year's separate returns. That’s great advice and good in theory, but mutual, calm agreement is not always present in divorce! Lack of communication often makes it difficult to calculate the portion of estimated tax payments that should be assigned to each spouse. In some cases, one spouse may file his or her tax return early in the tax season, since it has minimal activity, and have a large refund already credited before the ex-spouse files his or her tax return. There’s not much you can do at that point. To the best of your ability, maintain open, honest, and calm communication with your spouse during your divorce.
Overpayments on past returns:
IRS Sec. 6402(a) provides that overpayments should be credited against the tax liability from the person who gave rise to the overpayment. In other words, an overpayment cannot be credited to the person who did not pay tax to generate the overpayment. If both spouses contributed to the overpayment on a prior jointly filed return, the overpayment should be apportioned to each spouse proportionate to his or her tax obligation in the current year.
Again, great in theory. In too many cases, however, the IRS will ignore these calculations and simply allocate the entire overpayment to “taxpayer” without allocating any of the overpayment to the “spouse.” This can be the case even if a suitable calculation was done and documented on the taxpayer's and the spouse's separate returns. It’s a little unfair, but it is what it is.
If you’re facing this situation, a potential solution might be to treat the overpayment as a marital asset or part of your community property. This will allow one spouse to claim it and have it be offset against other assets being divided in the divorce. If you can maintain good communication with your spouse, this approach might prove easier than providing a calculation to the IRS, which might just overlook it anyway.